Based in Sydney, Australia, Foundry is a blog by Rebecca Thao. Her posts explore modern architecture through photos and quotes by influential architects, engineers, and artists.

What Are the Benefits and Disadvantages of Replacing Convertible Notes with a Simple Agreement for Future Equity (SAFE)?

SAFE financing documents became viral when Paul Graham from Y Combinator tweeted: 'Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.

Benefits of using a safe

SAFE docs are very short, 5 page documents, with very little to negotiate (just the valuation caps). Therefore, startups and investors won’t have to spend a lot of time and legal fees on hammering out the details of a safe. An outstanding safe would be referenced on the company’s cap table like any other convertible security (such as a warrant or an option).

Drawbacks of using a safe

A SAFE doc is not a debt instrument, so it doesn’t accrue interest or have a maturity date (so it might not convert to equity at all). SAFE requires a company to be incorporated, not an LLC, like many early stage startups are. If a company is in the form of an LLC, it may have to pay legal fees to consult with a lawyer to convert to a C-Corp. Safes are also only about 2 years old, created by Y Combinator in Dec. 2013. (So angel investors, VC’s and attorneys often have less experience and trust in using a safe over something more established, like a convertible note.)

Stay tuned - the jury’s still out on whether convertible notes or safes are better for startups. 

Are There Publicly Available Legal Documents for Seed Funding with Convertible Notes?